So you’ve decided to grow your wealth but don’t know the best investment strategy to take. Should you invest in real estate or build a portfolio of stocks? The best way is to pick an investment strategy that fits your needs and budget, whether you’re saving for a college fund, a retirement plan, or simply earning a residual income.
Ex-banker, father, and owner of Financial Samurai – Sam Dogen answers the question on “how to pick the best investment strategy“? “As an investor of both asset classes for decades now, the decision comes down to your financial means, risk tolerance, personality, and on-going returns choice”.
According to the Census Bureau, about 63% of Americans own investment in real estate. This has been down from a record of 69% participants in 2004. On the other hand, 52% of Americans participate in the stock market exchange, according to a 2019 Gallop poll.
It’s no surprise that real estate is very much preferred as the top pick for investors, beating out stocks and mutual funds, gold, savings account, and bonds. With real estate, you are more in control of your tangible assets.
The Gallop poll from 2017 shows an upward movement causing more cash flowing for the housing market. Americans saying real estate investment is the best long-term investment shows a 34% positive response in 2017 from 19% in 2011.
Real estate and stocks are the most popular options for investing and growing your wealth. The best way to learn which is better is to know the differences between the two investment options. Then make a decision based on the one that suits you best. Keep in mind that you can invest in both.
“I strongly believe anyone looking for financial independence should own both asset classes – real estate and stocks”, he adds.
What are Stocks?
Stocks are portions of companies that have made their businesses available to the general public to invest in them. Before going public, companies are obliged to make an Initial Public Offering (IPO) for external investors to be aware of their open doors. Companies offer stocks to investors as a way to raise money to increase their internal development and growth.
You can make money with stocks in two ways. First is when the value of the company increases, which is also called value appreciation. The second is dividends. People choose to invest in the stock market because, unlike real estate, it doesn’t take much money and effort to buy stocks.
There are basically two types of stocks. These are preferred stock and common stock or voting stock. The big difference between the two is that common stock gives you the power to participate in the operating of the company, while preferred stock doesn’t. With common stock, you can vote for the board of directors and other policies of the company.
On the other hand, both stocks sometimes offer dividends on each share you own as an investor. It is widely noted that when you purchase stock, you buy a piece of ownership in that same company.
Stocks can be bought on stock exchange platforms all over the world. Investors in the United States can use popular stock exchanges in the country such as NASDAQ or NYSE to purchase stocks.
Investing in Real Estate
Real estate investing comes with five options. You can use stock exchanges and brokers to invest in Real Estate Investment Trusts (REITs). Flip houses for income returns, invest through crowdfunding real estate platforms and online brokerages or utilise real estate investment groups (REIGs). The last option is to purchase and manage your own rental homes.
Investing in real estate requires an extensive amount of research beforehand because it’s not something you can go into at once and expect immediate returns. One of the main issues associated with real estate is the costs and dealing with the tenants. This is especially true for those who own rental properties or home flippers who always need to handle and manage repairs and rentals.
The most popular types of real estate are industrial, commercial, retail, mixed-use and residential. All of these are tangible assets with the added benefit of diversification. This is why it is so appealing to investors.
Investing in real estate provides a steady income by collecting rent from tenants and through market appreciation. This is when the value of the property goes up.
An easier option is to invest in Real Estate Investment Trusts (REITs). It offers a more hands-off approach to investing in the housing market. REITs are establishments that own and operate income-producing rental properties. This includes mortgages, medical centres, apartments, warehouses, malls, offices, hotels, and other real estate properties. Real Estate Investment Trusts make it super easy for investors to earn passive income from companies that own, operate and manage properties.
Companies that buy and operate real estate properties and then sell shares of those properties to interested parties (investors) through public or private means are referred to as REITs. You can invest in Real Estate Investment Trusts through online brokers by purchasing shares of publicly-traded REITs, ETFs and REIT mutual funds.
Pros of Stocks
The most appealing benefit of stocks is that it does not take much time and money to get started. This is not the case with real estate that requires a great deal of investment.
You can rely on stocks in times of emergencies as they’re highly liquid and can be easily bought and sold. Not to mention, some portfolios offer dividends, allowing investors to earn income in the form of cash pay-outs from the shares they own.
“If you need immediate cash or decide to change your stock holding, you can easily sell your stock portfolio and receive instant cash within 3 days. Selling your property, however, could take as long as two weeks or never if the home is not priced correctly”, he says.
With so many stocks and ETFs in the market, it’s much easier to build a diverse portfolio of investments, unlike owning a diverse selection of properties. You can purchase shares in ETFs, index funds and mutual funds, as they offer shares in a huge variety of businesses, giving instant diversification.
There’s also a reduction in the number of transaction fees to carry out stock trading as many brokers offer a wide selection of zero transaction fees. The only thing you’ll need is an online brokerage account to buy and sell stocks.
Cons of Stocks
Selling your stocks may be subject to capital gains tax unless you’ve held your portfolio for more than a year. In this case, you qualify for paying a lower tax rate. You may also need to pay taxes on any dividend paid by your portfolio during the year.
Stocks are much more volatile than the housing market due to internal and external factors that impact how successful a company is. The price of stocks rising and falling much faster than the housing market leads to a risky investment. This makes it easy to feel overwhelmed unless you plan to buy and hold your portfolio despite market volatility.
Pros of Real Estate
Investing in the housing market is easy to understand. You buy a property, manage it (including tenants if you have an additional residence), and then sell it for a higher value. It is also a tangible asset that makes you feel more in control of your investment.
It is less risky to invest in real estate than stocks. The term ‘mortgage’ means you can buy a new property with a 20% down payment or lower and then refinance the rest of the housing cost.
Real estate investing gives you the added advantage to qualify for tax deductions on houses you own and manage. This includes property insurance, capital gains tax, maintenance costs, etc.
“In 2020, if you have a mortgage indebtedness of up to $750,000, you can deduct the interest on your primary home. Married couples can sell their residence for tax-free profits up to half a million dollars and singles up to $250,000 if the home lasted for 2 of 5 years”, says Sam.
Real estate investing can help you earn a passive income through rental value paid by tenants. Also, inflation helps the rental and property value of the housing market to increase, giving you a maximum ROI.
Cons of Real Estate
Investments in the housing market take up more work than stocks. Unlike stocks, investing in real estate means you’ll have to work very hard in managing and maintaining your housing assets. Not to mention it requires a lot of costs for upkeep.
Real estate investments are expensive and illiquid. A huge amount of investment is required to buy a property. Stocks, on the other hand, require a small fee to purchase. The ease of buying and selling stocks is simply a process of point-and-click. This is not the case with the housing market. The fact that real estate investment is illiquid means you can’t sell your property with ease when in need.
It’s very challenging to diversify your investments in real estate as location matters when it comes to the housing market. It’s important to know that many investors put their money into both investment options. This helps investors to choose different portfolios, reduce risk and maximise the return of investment.